LONDON, Aug 11 (Reuters) - Bulgaria’s Corporate Commercial Bank (Corpbank) failed to make the final payment on a dollar-denominated bond that matured on Friday, two bondholder sources said, increasing the risk bondholders will take legal action against the state.

A group of angry Corpbank depositors protested on Monday in front of the central bank in Sofia, demanding access to their accounts. Deposits have been frozen even though Bulgarian law provides for a deposit guarantee of up to 100,000 euros.

Bulgaria’s fourth-largest lender has been shut since late June, when a week-long run on deposits prompted the central bank to seize control of Corpbank and freeze its operations, in the country’s worst banking crisis since the 1990s.

Bulgarian authorities’ efforts to rescue the lender have been derailed by politics, however.

The Socialist-led coalition government resigned in July, and its president, who appointed an interim government until elections in October, said no action could be taken on Corpbank until an independent audit into its books was completed, around the middle of October.

The central bank and the finance ministry have sent a letter to the European Commission explaining that they had no legal means to resume payments of guaranteed deposits until possibly after the Oct. 5 polls.

Reuters reported in July that a group of bondholders, including U.S. and European hedge funds and financial institutions, had formed a creditors’ committee and hired legal representation in Bulgaria in the event the government tips Corpbank into insolvency.

“On Friday Aug. 8, Corpbank, fully under the control of the Bulgarian National Bank, missed the final payment on its bond after previously missing a coupon payment in July,” a group of Corpbank bondholders familiar with the process told Reuters.

“Given the lack of any substantive communication from the government, bondholders will pursue legal remedies against the state and the bank. Bulgaria’s politicians not only risk a protracted and expensive legal battle, but lasting damage to its reputation as an investment destination in the EU,” they said.

INSUFFICIENT FUNDS

The European Commission has urged Bulgaria to start making at least partial payments to depositors.

“We want the bank to open now. We want to be treated like European citizens, but obviously this is not the case,” said Penka Ilieva, 36, who travelled from her home town of Dupnitsa to protest in Sofia.

The central bank and the finance ministry said on Monday that under current Bulgarian law, guaranteed deposits of up to 100,000 euros can be paid only if the bank is declared insolvent. It also said that partial repayment of depositors before that could jeopardise any rescue effort.

Bulgaria’s Deposit Insurance Fund has only 2.1 billion levs at its disposal, while the guaranteed deposits amount to about 3.7 billion levs, and the shortfall can only be covered by a state-guaranteed loan, which needs parliamentary approval, the letter said.

“Because at the moment the parliament is not functioning, changes in the laws are not possible, nor is ensuring the additional 1.6 billion levs needed to repay the guaranteed deposits,” the letter said.

“Such decisions can be made from the next parliament after the Oct 5. election”

The crisis prompted the central bank last week to ask the International Monetary Fund to carry out an in depth review of Bulgaria’s financial sector.

The Corpbank bond had already missed a coupon payment in July, prompting Moody’s rating agency to downgrade the $150 million bond to Ca from B3.

“The maturity payment was missed on Friday,” a London-based hedge fund manager told Reuters. “There is a seven-day grace period. We are working through our legal options right now.” (Additional reporting by Tsvetelia Tsolova in Sofia; editing by Jane Baird)